Last week, U.S. banks boosted the borrowing bases for several independent energy companies, lifting spirits in the industry. The move was taken as a sign that lenders are beginning to share in the optimism that oil and gas producers have been enjoying since the beginning of the year, with prices staying above $50.
While some banks seem to be sharing some of the optimism, others are more cautious. A recent analysis from Bloomberg Gadfly’s Lisa Abramowicz reveals that a lot of energy companies with revolving credit lines are tapping deep into these resources. Abramowicz cites data from Bloomberg Intelligence that shows at least 11 companies have used up more than two-thirds of their credit lines.
Banks, Abramowicz says, do not like this, so they may well decide to cut the credit lines of companies they consider risky. They can afford to—exposure to the oil and gas industry is more modest than it was three years ago, and Abramowicz argues that lenders can afford to let some smaller companies go under.
The latest Haynes & Boone borrowing base survey reveals that banks believe a fifth of energy companies will see their borrowing bases cut this year. The industry is a bit more pessimistic, seeing the portion of companies to suffer credit line cuts at 27 percent.
Now, this could be interpreted in two ways. One is the optimistic way, which basically comes down to “It’s just 20 percent, the other 80 percent are doing well.” That’s certainly true, and the latest demonstration of the optimistic view came less than a moth before Haynes & Boone released their survey.
In March, WTI traded below $50 for the better part of two weeks, sparking worries that banks may revise downwards their borrowing base redeterminations, and potentially stall the resurgence of the U.S. oil patch. The worry is still there, but the overall mood is upbeat—after all, after the bankruptcies the survivors emerged from the crisis leaner, meaner, and much better prepared to deal with adverse price environments.
Banks could not have failed to notice that, as evidenced by other data from the Haynes & Boone survey: the overwhelming majority of respondents in it, both from the banking and energy industries, believed that 76 percent of energy players will enjoy an increase of their borrowing bases this year. In the previous survey, from last fall, the majority of respondents expected happier borrowing base times for just 59 percent of energy companies.
However, the overall optimism seems to hinge on two factors: low production costs across the shale patch and OPEC’s imminent decision to extend its production output agreement for six more months. There may be a problem with the first one, giving reason to doubt the optimism.
While drillers are passionately talking about the tech improvements that have boosted their efficiencies and brought down costs, some – mostly from the oilfield service sector – argue that it was actually low service prices that led to the production cost drop.
Energy companies will be announcing their new credit agreements in the coming weeks, and oilfield service providers will likely continue to raise the prices of their services, affecting producers’ margins. All in all, the situation remains uncertain even though on the surface all is looking good for U.S. oil and gas.
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